Size the loss before the trade
Choose the dollar loss and the stop distance first. Position size is that loss divided by the distance, so a fixed quantity can lose a different amount.
Position size is the quantity that makes a chosen dollar loss match the distance to the stop. Choose the loss and the stop first. Dividing the loss by the distance gives the size. A quantity chosen first, with the stop applied afterward, makes the loss a result instead of a limit.
The division
Let equity be the capital the position is sized against. Let the risk fraction be the share of that equity you accept losing if the stop fills at the planned distance. The stop distance is a price difference per unit, in money.
risk amount = equity x risk fraction
position size = risk amount / stop distance
The second line is the whole method. A wider stop means a smaller size for the same dollar risk. A tighter stop means a larger size. The dollar loss at the planned stop stays the risk amount in both cases, before extra slippage and fees.
Tradee uses this shape when bot sizing is set to risk. The stop distance can come from the strategy's stop, including a volatility estimate such as an average true range times a multiplier. The fraction is applied to the instance's slice of modeled capital, not automatically to every account you have elsewhere.
The 1% figure below is a worked example so the arithmetic is easy to check. It is not a recommended risk level. A fraction that is sensible for one person can be reckless for another, and this page cannot see your situation.
Same stop, two losses
The figures in this article's images are a worked example, not a recorded backtest. Equity is $10,000. The stop is $2 away from the entry. The risk fraction in the sized case is 1%, so the risk amount is 10,000 x 0.01 = $100.
The market did the same thing in both sentences. The quantity changed the loss. If the stop were $4 away and the risk amount stayed $100, the size would be 100 / 4 = 25 units. The planned loss would still be $100. Size moved. The loss budget did not.
Costs sit on top. Commission, spread, and slippage can make the filled loss larger than the planned distance. Why win rate is not enough shows how those costs change expectancy. Size does not remove them. It decides how many units they apply to.
When the formula cannot run
The division needs a stop distance at the moment of entry. If the strategy has no stop yet, because the level is missing or a volatility input is still warming up, there is nothing to divide by. Tradee does not invent a distance in that case. Risk sizing uses its fallback, a percent of the slice or a fixed quantity, so the entry can still happen. The dollar loss is then no longer the figure you set in the risk fraction. If you need the loss to stay at $100, the strategy needs a stop distance before the entry, and the test needs to show that the distance was available.
A fixed or percent size is a valid choice when you mean it. It answers "how many units," and the loss follows. Risk sizing answers "how many dollars if stopped," and the units follow. Mixing the words is how a 1% note becomes a 2% loss, as in the 100-unit example.
Daily and weekly loss caps are a second layer. They limit how much the bot or the instance can lose over a window. They do not replace the per-trade division. A cap can stop new entries after damage. The size rule decides the damage of the entry that is about to open.
What to keep next to the rule
- The equity the fraction applies to. In Tradee, start from the instance's modeled slice.
- The fraction, written as a number you can recompute.
- The stop distance, and what happens when it is missing.
- Whether costs are inside the $100 or added after it. This example adds them after.
- The same answers in the backtest and in the paper execution.
Strategy, bot, and execution separates the rule from the run. Size belongs on the bot. A strategy can define the stop and still leave quantity unset until the bot applies a sizing mode.
FAQ about position size
Does a tighter stop make the trade safer?
It reduces the price distance. It increases the quantity if you keep the same dollar risk. The planned dollar loss stays put. A tighter stop can also be hit more often. Safety is not a property of the distance alone.
Should every entry risk the same fraction?
Only if that is the rule you are testing. The point of writing the fraction down is to know the loss when the stop hits. Changing the fraction between trades changes the experiment. This page does not pick the fraction for you.
Methodology and sources
The formula is the risk-sizing identity used by Tradee: risk amount from equity and a fraction, size from that amount and the stop distance. The example uses equity $10,000, a $2 stop, a 1% fraction, 100 units, a $200 loss, 50 units, and a $100 loss. Each product is exact. The 1% input is illustrative. This article is educational and does not provide personalized investment or trading advice.
This article is for education. It is not financial advice. Trading can lose money. Past results do not guarantee future results.